Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Cytokinetics, Incorporated (NASDAQ:CYTK) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Cytokinetics's Debt?

As you can see below, at the end of June 2024, Cytokinetics had US$655.0m of debt, up from US$609.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$1.06b in cash, so it actually has US$401.8m net cash.

How Healthy Is Cytokinetics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cytokinetics had liabilities of US$102.8m due within 12 months and liabilities of US$1.31b due beyond that. Offsetting these obligations, it had cash of US$1.06b as well as receivables valued at US$834.0k due within 12 months. So it has liabilities totalling US$357.6m more than its cash and near-term receivables, combined.

Since publicly traded Cytokinetics shares are worth a total of US$6.57b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Cytokinetics boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Cytokinetics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Cytokinetics had a loss before interest and tax, and actually shrunk its revenue by 69%, to US$3.1m. To be frank that doesn't bode well.

So How Risky Is Cytokinetics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Cytokinetics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$401m and booked a US$545m accounting loss. But the saving grace is the US$401.8m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Cytokinetics you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.